Consumer Spending Drives GDP Higher

Leading a report that speaks to the risk of overheating, consumer spending drove GDP significantly higher in the second quarter, to a 4.1 percent annualized rate which, however, just misses Econoday's consensus for 4.2 percent. Consumer spending rose at a very strong 4.0 percent rate in the quarter to contribute 2.7 points of the total rate with spending on services contributing 1.5 points. Spending on goods, split roughly evenly between durables and nondurables, contributed 0.6 points.

Net exports were the next biggest contributor, adding 1.1 points and reflecting strong improvement in exports that offset a slight increase in imports. Nonresidential fixed investment contributed 1.0 point to the quarter led by structures and intellectual property with equipment only slightly positive. Government purchases were also a positive contributor at 0.4 points.

Inventories are another major story in this report, falling $27.9 billion for a 1.0 point subtraction from GDP. When excluding inventories (final sales), GDP came in at 5.1 percent. And the pull lower from inventories is actually a positive for the economy, as inventories are too low and need to be rebuilt which should be a positive for third-quarter GDP. Residential investment proved only marginally negative in the second quarter.

To top this very strong report off are price pressures as the GDP price index came in at a very hot 3.0 percent, vs 2.0 percent in the first quarter and exceeding Econoday's consensus range by 5 tenths. But the core, which excludes food and also energy prices which have been high, shows much less pressure, at 2.0 percent vs the first quarter's 2.2 percent.

Overheating would appear to be a danger for the economy right now, consistent with the array of regional and private economic data where delivery delays, input costs and even price pass through are at or near record highs. Today's report includes benchmark revisions including a 2 tenths upgrade to first-quarter GDP which now stands 2.2 percent. Also of note, the savings rate for 2017 is revised much higher to 6.7 percent from 3.4 percent.